Lululemon 3Q25 Immediate Call Postmortem
Calvin stepping down is what everyone wanted well now you have it. As much as people love hating on him, he did oversee a massive period of growth (tripled revenue) into an approximate tie with Nike for world largest athletic apparel brand. Combined with the recent departure of Celeste it doesn’t provide much confidence that that they are” beginning to make progress against our action plan and continue to expect to see the impact of this work in 2026”. Nagel nailed this in Q&A – no change to what they have been working on for the past year and much enthusiasm for the newness that is coming plus work team still has to do. Guess the good news is that everyone responsible for the mess the company is in today are no longer at the company by now.
China comps up 24% - there goes one of the major themes of the consensus bear thesis. Now expect country to be at or above prior full year guidance of 20%-25%. Still talked down 4Q due to early 11/11 and later new years. Gaining share and seeing success across all tier cities. Have to say not too happy about the underperformance in ROW though (9% vs. 14% estimate) - wish somebody would have asked about that.
Meghan took lead on most detail for the call today. Admitted that certain styles you see today do not reflect their go forward vision for the brand, which is huge in my opinion. We got a lot of discussion on lead time reduction but I still not sure how they can manage that with technical product – sounds like the BOD just wanted to proactively address all the public criticism from founder Chip. Bringing down core lead times to 12-14 months from 24 before...ok...
She made it a point to call out the strong cash flow generation with a billion in cash and no debt (outside the normal financial review section of the script). That combined with the additional repurchase announcement today was pretty much an outright admission they going to be much more active in the repurchase market.
US demand was in line with Q3 expectation. Best month August, softest October but that was planned. QTD saw strong Thanksgiving result but have seen some pullback in demand afterwards that is reflected in guidance. Will start to see benefits of newness in Q1. Kept full year US within prior guidance range of down 1% to up 2%.
Full year markdowns now expected to be 70 basis points higher than last year. That’s up from 50 basis points last quarter and the 10-20 basis points before that. Bears were almost certainly looking for a much worse number than this. Overall gross margin now expected to be down 270 basis points for the full year versus the prior 300 basis point guidance due to lower than expected tariff impact.
Negative margin factors will outweigh the positive factors in 2026. The margin push will be a multi-year effort at looking for efficiencies to offset the pressure from tariffs and de minimis.
Continue to see pressure in the apparel space. Held share in premium athletic but lost some share in performance as guests are trading down.
On track to 35% newness goal in Spring. Overall batting average on the newness is good. As far as upcoming innovation they have a new fabric that’s designed for weight training that they are excited about. Refreshing core franchises like ABC pants, Scuba, and Swiftly. Talked a lot about how international business is much less saturated in core product so continues to resonate well but need to launch newness in Americas.
Have not taken any further pricing relative to what they mentioned last quarter. No imminent plans to go further there. Elasticities they see are in line with expectations from a margin perspective and don’t see any concern here.
Lorraine got more details on the AMEX partnership in Q&A. Pleased with new guest acquisition from the partnership in both mens and women’s. Relatively small business but happy with the profitability of the program. Importantly – they have a share in credits and that is a reduction to revenue.
Sole asked about organizational structure during transition – which is super important question so kudos to him. Product, merchandising, and design will report into Meghan. The team has already made most decisions on product for first half of next year. Just now completing the winter buy for 2026.
*These are our unabridged quick thoughts and notes from the call. We get them out as soon as possible after the call ends. Management has given some topics to dig deeper into and will circle back afterwards with much more in depth work on what was mentioned. You can find that work (and more on Lululemon and other retail/consumer research) at the website here: M Squared Capital
Originally posted on X and Substack.